Brazil Markets Search For Direction After Holiday

Brazil current account deficit came in at a wider than expected -$5.7 bln in March, but was fully covered by FDI totaling $6.8 bln that month. On a 12-month rolling basis, FDI was $60.4 bln vs. a current account gap of -$49.8 bln, pushing the basic balance up to +$10.6 bln, the highest since September 2009. As a share of GDP, the current account deficit has remained around -2.3% since September 2010. Finance Minister Mantega said that through the 26th , FDI totaled $4 bln in April and so the inflows remain strong and supportive of the real. And this doesn’t even include any of the portfolio inflows. A slow grind lower for USD/BRL remains in play, though markets will be nervous around 1.5545, the 2008 low as more FX measures are likely to be seen on a break towards 1.50.

Since coming back from the 4-day holiday weekend, Brazil markets have traded largely sideways. USD/BRL made a marginal new low for the cycle Monday around 1.56 but no follow-through has been seen, while the Bovespa has been hovering around 67000. Markets are getting a bit concerned about central bank credibility after it hiked by only 25 bp this month instead of the expected 50 bp, even as inflation is moving towards the 6.5% ceiling (6.44% y/y in mid-April). Minutes from the April 19/20 meeting will be released this Thursday. We already know that the vote was split 5-2, with 2 dissenters wanting a 50 bp hike, but markets will be looking for how the discussions were framed. Loan data for March is out Wednesday, and has been accelerating to 21% y/y, the high for this current cycle. Inflation and inflation expectations continue to creep up, and so macroprudential measures are clearly not working to date. COPOM next meets June 7/8, and with the numbers still deteriorating, we think that they should deliver a 50 bp hike to try and regain credibility. Whether they actually do it is another matter.

Win Thin is the Head of Emerging Markets Currency Strategy at Brown Brothers Harriman. He has a broad international background with a special interest in developing markets. Win received his Ph.D. in economics from Columbia University in 1995, specializing in international and development Economics. He received an MA from Georgetown University in 1985 and a B.A. from Brandeis University 1983.